Japanese Finance Minister Sadakazu Tanigaki has said he will take "decisive" steps to keep a strong
yen from hurting the economy.
The yen may choke off any hope of recovery
The currency has again risen, hitting 111.25 yen in the US dollar despite intervention by the Bank of Japan to push it back down.
The rise was driven by a positive report from the Tankan survey of Japanese business sentiment, showing confidence at a three-year high.
"The appreciation of the currency and of improved stock prices simply reflect the improved prospects of the economy going forward," Goldman Sachs economist Kathy Matsui told BBC World Business Report.
But policy makers worry that a persistently strong yen - which has risen by more than 20 since the beginning of last year - could cripple any export-led recovery for the struggling Japanese economy.
In September, the Bank of Japan sold yen worth almost $40bn in an attempt to constrain the currency, and was selling heavily on the overnight currency markets.
Strangled at birth
Japan's economy, heavily oriented towards exports, is vulnerable to exchange rates, and economists argue that a weak yen would be the best way for it to escape recession.
But the government's hopes of keeping the yen at 130 or so in the dollar have been hampered by signs that Japan's corporate sector is starting to recover - a trend that boosts the stock market and brings foreign investment into the country, keeping the currency buoyant.
"Fundamentals dictating the direction of the yen continue to point to strength rather than weakness," Ms Matsui said.
There is now concern that any long hoped-for recovery could be choked off quickly by exchange rates.
Mr Tanigaki, appointed only last month by Prime Minister Junichiro Koizumi, and whose views on the currency have not yet been fully spelled out, has now said he will pursue the interventionist policies of his predecessor.
This is despite a call at last month's G7 meeting for rates to be set by market forces, an announcement that many said was aimed at Japan.
Drawing a line
According to traders, the Bank of Japan has set 110 yen as its maximum dollar rate, a level that it will defend with all the resources at its disposal.
But markets are usually able to defeat even the most implacable central bank intervention, and there have previously been reports that the bank had spent all the funds it had set aside for supporting the dollar.
Elsewhere in Asia, too, there is concern over exchange rates.
The US dollar on Wednesday hit a five-and-a-half-year low against the Australian currency, leading to fears there that exports may suffer.
In India, less reliant on earnings from exports, it hit a three-year low against the rupee.
And China is coming under pressure to liberalise its exchange rates, after US concern that its yuan is artificially undervalued against the dollar.